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Air France-KLM to battle fuel cost rises with deeper integration

Company earnings fell 20% to €776m

Wed, Feb 20, 2019, 08:56

An Air France Airbus A319 plane. Photograph: Stephane Mahe/Reuters

Air France-KLM pledged new efficiency gains to offset higher fuel costs this year, as the airline deepens cooperation between its two main carriers.

The Franco-Dutch group’s fourth-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) fell 20 per cent to €776 million as its fuel bill mounted, despite a 4.1 per cent revenue gain to €6.54 billion.

Air France-KLM shares were down 3 per cent in early trade, after it said unit revenue fell 0.6 per cent in the last three months of 2018 and would decline further in the current quarter.

But chief executive Ben Smith, who joined in September, promised better-coordinated networks and fleets, after overcoming KLM resistance to closer integration.

“These first achievements pave the way for our ambition to regain a leading position in Europe and worldwide,” Mr Smith said in a statement.

Blighted by restrictive French union deals and strikes that last year wiped €335 million off earnings and forced out its previous chief executive, Air France-KLM has trailed rivals Lufthansa and British Airways on profitability.

But Mr Smith, an Air Canada veteran, has restored labour peace by granting wage hikes in return for increased flexibility with which he now hopes to make better and more profitable use of the group’s aircraft and networks.

On the eve of the results, Air France-KLM struck a new pay deal with its French pilots and resolved a standoff with KLM and the Dutch division’s popular leader Pieter Elbers, over Mr Smith’s integration plans.

Wariness on the Dutch side is partly explained by the relative underperformance of Air France - whose 2018 operating margin was 1.7 per cent, compared with 9.8 per cent for KLM.

Decisions

Almost 15 years after the Air France-KLM merger, decisions on networks, fleets and commercial strategy will now be taken by the group rather than the individual carriers, under the plans unveiled on Tuesday - which also sees Mr Elbers and Air France counterpart Anne Rigail become deputy group chief executives.

“While a new chief executive with an impressive track record has been appointed and short-term pay deals agreed with the French unions, we await details of his new strategy,” Liberum analysts said in a note, voicing concern over “a deteriorating unit revenue trend against a backdrop of higher fuel prices”.

The fuel bill rose by €451 million in 2018 and will climb another €650 million this year as hedges expire, chief financial officer Frederic Gagey told reporters on a call.

Overall unit costs, up 0.6 per cent last year before currency and fuel-price impacts, were “well under control”, Mr Gagey said. While unit revenue will likely decline in the first quarter, due in part to a later Easter holiday in 2019, summer bookings are “better positioned” than a year ago, he said.

The group said 2019 costs are expected to come in somewhere between flat and a 1 percent decline, on the same basis.

Passenger traffic rose 3.4 per cent to 24.46 million in the last quarter, the group said, while crossing the 100 million threshold for the full year.

The low-cost Transavia arm was a bright spot, posting a 9 per cent 2018 operating margin for its French operations as it prepares to expand capacity by 9-11 per cent in 2019, while overall group capacity expands a more modest 2-3 per cent. – Reuters